Growth in Canada's telecommunications restrained by affordability

Sharp price increases, changing consumption habits and a slower economy will cause Canadian consumers to reassess their telecommunications spending in 2015. Industry revenues are forecast to increase by only 2.3 per cent this year, the smallest increase since the 2009 recession, according to The Conference Board of Canada's latest Outlook for Canada's Telecommunications Industry.

"Although consumers' thirst for wireless data is set to grow at a rapid pace for the foreseeable future, their capacity and willingness to spend more on telecommunications services will not follow suit," saidKristelle Audet, Senior Economist, with The Conference Board of Canada."The amounts households are dedicating to TV, Internet and wireless services will continue to be constrained by slower growth in disposable income and high debt burdens."

HIGHLIGHTS

Slower economic growth due to the significant fall in Canadian oil prices and a sharp increase in telecommunications prices over the past year are affecting consumers' ability to afford their current telecom services.

The telecommunications industry's GDP is expected to expand by less than 1 per cent in 2015.

New regulatory policies and regulations could hamper profitability growth.

The industry's adaptation to the new ways of consuming TV content will help offset weaker growth in the traditional paid-TV segment.

With the share of Canadian households subscribing to paid-TV services declining at an accelerated pace, Canadian TV providers have recently introduced their own video-on-demand services to better compete and protect their market share. Indeed, increasing the variety of paid content available to all Internet users rather than TV subscribers alone is likely to help mitigate the impact of declining revenues from TV subscribers. In addition, it may also help telecom carriers compete with the growing range of premium content now available directly from television networks.

Industry sales will also be constrained by weak business investment. The deterioration in the Canadian business environment over the past year will likely make firms more cautious when it comes to spending on telecommunications equipment and services, possibly opting to postpone upgrades until the economic outlook brightens.

Likewise, the telecommunications industry is unlikely to get much of a boost from the public sector over the near term. The decline in oil prices has slowed revenue growth in oil-producing provinces, as well as for the federal government.

Since the adoption of the Canadian Radio-television and Telecommunications Commission's (CRTC's) wireless code in 2013, there has been a sharp increase in prices charged by the industry. The telecommunications price index rose by almost 5 per cent in 2014, most likely driven by wireless price increases. Having to bear the sharp hike in the cost of monthly wireless plans, some consumers had no choice but to try to reduce their spending on other types of telecommunications services.

Price increases will remain strong at 3.7 per cent this year due to the carryover effect of the significant increases seen in 2014. In 2016, however, price increase are expected to moderate. In fact, the big telecom carriers will likely realize that consumers do not have room in their household budgets to bear higher wireless prices without decreasing demand for other telecom services.

That said, the telecommunications industry has managed to maintain a very stable pre-tax profit margin, averaging 13 per cent since 2007. With little threat to the incumbent's dominance in the wireless segment by far the most profitable one the industry will be able to sustain its high profit margin throughout the forecast period. Pre-tax profits are expected to end 2015 at $8.3 billion.